Middle East: Short-Term Opportunities Turn Into Long-Term Businesses

By Jason Bates

The more than 20 countries that make up the Middle East are thirsting for more satellite bandwidth in order to provide a wide variety of military and commercial services throughout the region. Companies that want to play in the market may have to jump through plenty of hoops to establish their businesses, but the opportunities could be well worth the effort.

The market for military satellite communications in the Middle East is strong and looks to remain so for the near term, but the commercial market in the region also could provide major opportunity for the industry going forward, industry executives and analysts say. Opportunities in video broadcasting, direct-to-home (DTH), broadband Internet, telephony and mobile satellite services abound because few countries in the Middle East have adequate terrestrial connectivity to meet the growing demand for such services.

At the end of 2004, more than 75 percent of the 949 satellite transponders serving the Middle East and Africa was controlled by five players: Arabsat, Eutelsat, Intelsat, New Skies Satellite and Panamsat, with Intelsat holding more than half of that capacity, according to analysts research. In 2004, satellite revenues in the Middle East and Africa were $770 million and are expected to grow at a rate of 2.3 percent per year, says Beram Gazdar, senior research analyst for satellite and space communication for Frost & Sullivan in Mumbai, India. There also are four regionally owned satellite operations: Turksat, Amos, Arabsat and Nilesat, that predominantly rely on broadcast traffic for their business, according to "Middle East Communications and Internet via Satellite," released in October 2002 by Spotbeam Communications Ltd.

One of the most well-known markets in the Middle East currently is providing commercial communications and other satellite-based services to the U.S. military. The U.S. Defense Information Systems Agency (DISA), which purchases commercial satellite capacity on behalf of the military, obtains most of the commercial communications services through the Defense Information Systems Network Satellite Transmission Services-Global (DSTS-G) contract. Under this mechanism, three companies compete to provide full communications services and act as an intermediary between the government and the large satellite operators. Use of commercial bandwidth by the military in the Middle East had steadily increased since Sept. 11, 2001, but has leveled off in recent months, DISA spokeswoman Terry Stover says. There currently is about 5 gigahertz of commercial and military bandwidth supporting military operations in the Middle East, and that demand is expected to remain steady as long as the U.S. military presence in the region is maintained at its current levels. Stover could not predict if this demand will decline as military operations in Iraq wind down, "but the [Department of Defense] is prepared to meet the demand no matter the length or type of operations," she says.

For Arrowhead Space and Telecommunications Inc. , one of the three DSTS-G suppliers, the Middle East and Southeast Asia provides about half the company’s work under the contract, says Dean Olmstead, Arrowhead’s CEO. Olmstead does not see the market for military communications in the region waning anytime soon. Even if the United States begin reducing its ground forces, there will still be a need for commercial satellite bandwidth to support operations by other government entities, such as Iraqi forces currently being trained by the U.S. military, he says. "There is no scenario under which we don’t remain present and active. Our forecast for it is that it will remain stable or grow. What we see is where the hostilities are cooled off a bit, the is still a need all of the communications for a variety of missions. The missions may change somewhat. You may not be flying an [unmanned aerial vehicle] to identify a tank to knock out, but you may fly it to keep an eye on people or cargo, or other things important to peacekeeping. We can’t foresee the applications. The utilization will shift a bit, but the overall demand from the government will be steady."

U.S. Air Force officials have acknowledged that the service is not very good at projecting its commercial satellite needs, says Maj. Karen Finn, a spokeswoman for the Air Force. In Operation Desert Shield and Desert Storm in 1990 and 1991, the Pentagon had difficulty accurately predicting how much commercial satellite communications it would need, "and that was a speck of where we are today," she says. "Now we are doing streaming video and there is increased demand from theater commanders. There is just a lot going on, and every time we think we have a handle on it, there is new technology that increases demand." According to Stover, the Defense Department regularly performs satellite communications requirements projections and capacity analysis for up to 15 year periods. "The most recent projections indicate that there will be a continued need for commercial bandwidth into the foreseeable future," she says. If the Department of Defense exercises all the options, the DSTS-G contracts will run through February 2011, but the satellite operators are hoping to capture a larger portion of the government contracts going forward and have helped spur a review of government procurement procedures related to commercial satellite capacity.

Commercial satellite imagery operators also are benefiting from the U.S. military operations in the region under their Nextview contract with the U.S. National Geospatial- Intelligence Agency. Military operations in Iraq, as well as political situations in Iran and Syria, are driving a good percentage of the business for Orbimage Inc., says Gary Adkins, the company’s senior director of national and federal security programs. "Demand for imagery within the region remains very high," he says. "The immediate challenge is to meet the demand. Since the Middle East developing as a market is not as mature as North America or Europe, but we do not anticipate a decline in demand anytime soon. Since the imagery provided by the commercial imagery satellite operators is used primarily for mapping and is not classified, Adkins does not expect a winding down of military operations to hurt demand for commercial satellite imagery either.

While military operations and political unrest in the region dominate the global headlines, there also is an active and growing commercial market in the Middle East. Currently, video broadcasting is forecasted to grow at a rate of 5.4 percent per year through 2010, with growth in other services expected to increased the number of transponders leased over the region to 743 by 2011. Political issues throughout the region are likely to restrain commercial growth for a time, but commercial services already are in demand and will replace military demand for commercial satellite transponder time in the long run, says Gazdar. The most prominent use for satellite transponder capacity in the region is video broadcasting, with 253 transponders over the region leased for video services. "The forecasts that I’ve been engaged in showed a balancing of activity between commercial and government over the mid-term," says Olmstead. "My prior forecast for the commercial sector show it growing at pretty healthy clip over the next three to five years to reach equivalent levels with the government. A lot of that will be video, network extension connectivity and a good chunk of broadband."

The most promising countries of opportunity for commercial services are Saudi Arabia, Egypt, the United Arab Emirates and Kuwait, analysts say. Initiatives in Saudi Arabia and the United Arab Emirates will most likely make those countries the hubs for content distribution throughout the region, Gazdar says. "There is not much fiber in the region, so how else [but by satellite] will there be connectivity? It’s too expensive to lay fiber, so people are not thinking about that. I expect people connected by fiber will be very few, and satellite connectivity will be quicker and more cost effective."

With little terrestrial connections available, the market for DTH services looks to be promising, especially since terrestrial TV services in many countries in the region are state-owned, with little evidence that the governments are willing to give up their control, analysts say. "Overall, and despite some immediate problems, we expect continued long- term growth in DTH in the region," Spotbeam says. "We see no reason why penetration rates, in term of the percentage of households with DTH receivers, should not grow substantially."

There also is a good opportunity for satellite-based broadband Internet providers, as widespread, terrestrial-based connectivity could still be another decade away, Spotbeam says. But even penetration by satellite providers could be difficult, with demand for access being driven by the corporate sector and specialized circumstances such as providing voice services. Peter Carides, president and CEO of Tachyon Networks Inc., says the key to building the commercial market is building off of current government demand in the region. Tachyon, a satellite broadband solutions provider to multinational enterprises and government agencies, is doing that in several countries in the region, he says.

The satellite imagery providers are also seeing this type of transition. U.S. military business has helped demonstrate the utility of the data, and commercial companies, such as those in the oil exploration industry, are taking notice. "We’re doing extremely well in the region, and most of our business is commercial, which is the opposite of what I would have expected," says Digitalglobe CEO Herb Satterlee. "Obviously the government is buying there and the demand is constant but not huge. Demand in other parts of the region is growing, such as in Libya for oil exploration. There is a lot going on in the Africa and the northern Middle East being driven by oil." Oil industry activities in the United Arab Emirates, Oman and Kuwait also are helping Orbimage’s business, says Adkins. "The region is rich in natural resources and will drive a good bit of needs. In combination with rebuilding activities in Iraq, this certainly makes for excellent commercial opportunities."

To take advantage of many of these opportunities will require some work, and most likely establishing partnerships within each of the countries to deal with the various restrictions and demands placed by individual governments, officials say. "What you see certainly is government constraints, but I use that in the broadest sense," says Penny Glover, EMS Satellite Networks’ Managing Director for Europe, the Middle East and Africa. "There will be political issues, whether the country is in rebuild state or still coming out of war, or whether if it is just a question of the country opening up and issuing licenses. We have some traditional players behind the scenes operating in countries that are now more open and can deal more openly with Western partners. You need to find where some new service providers are and take the opportunity and believe in the market potential. Developing contacts within the region is big."

The face of the satellite services market in the Middle East will undergo a change over the next several years, industry officials and executives say. The military demand for commercial services may abate but probably will never end completely, and combined with expected growth in the commercial market, business opportunities in the region will be wide spread and varied for providers willing to invest the effort with the various governments in the region that will be required to become a strong commercial player.

Jason Bates is the Assistant Editor of Via Satellite Magazine.